IRS instructions and statute read firsthand, 1 September 2026

Purchase Price Allocation: Form 8594, the Allocation Schedule and the Seven Asset Classes

Purchase price allocation is the step where the single number on your purchase agreement gets split across the individual assets you are actually buying. On a US asset acquisition it is not optional and it is not a formality. Internal Revenue Code section 1060 requires both the buyer and the seller to allocate the consideration across seven asset classes using the residual method, and both sides report that allocation to the IRS on Form 8594, the Asset Acquisition Statement. The split decides what you get to deduct and how fast, and it decides whether the seller pays capital gains rates or ordinary rates on each slice.

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The mechanics are fixed and the arithmetic is simple. You work down the classes in order, from Class I through Class VII, assigning fair market value at each level, and whatever consideration is left over after Class VI lands in Class VII as goodwill and going concern value. That residual is why sellers care so much: goodwill is generally capital gain to them, while a covenant not to compete sitting one class higher is ordinary income. For you as the buyer, Class VI and Class VII are both amortized over 15 years under section 197, so on the buyer side the fight between those two classes is worth far less than sellers assume. The fights that actually move your money are between Class V and Class VI.

One point worth reading twice, because most guidance skips it. Section 1060(a) says that if the transferee and transferor agree in writing as to the allocation, that agreement is binding on both of them unless the Secretary determines it is not appropriate. The allocation is therefore a negotiated term of the purchase agreement, not a tax return exercise you do in March. If you leave it out of the agreement you will negotiate it later, separately, against a seller whose interests run opposite to yours, at a point where you have already paid.

Buyouts is a marketplace for AI SaaS where MRR, ARR, growth and churn are verified before a listing goes live. Browsing is free and buyer membership is planned rather than currently on sale. Listings shown in the product are illustrative UI. Nothing on this page is tax, legal or investment advice, the allocation of a real deal is an accountant question before it is anything else, and the figures below are read from primary sources and dated so you can check them yourself.

The allocation schedule is a term of the purchase agreement that happens to be filed with the IRS. Buyers who treat it as a tax return chore negotiate it four months late, alone, against a seller who has already been paid.

IRS Instructions for Form 8594, revision November 2021

The seven Form 8594 asset classes, and what each one does to your deal

The class definitions below follow the Instructions for Form 8594 as published by the IRS. The last two columns are ours: what the class typically looks like on a small US software acquisition, and where the buyer and seller actually disagree.

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Class	What the IRS puts in it	Typical size on a small SaaS deal	What the buyer recovers	Where the argument is
Class I	Cash and general deposit accounts, including savings and checking, but not certificates of deposit	Rare on a SaaS deal, most are structured cash free	No deduction. Basis equals face value	Neutral. Nobody argues about cash
Class II	Actively traded personal property, certificates of deposit and foreign currency	Almost never present on a small software deal	No deduction on acquisition	Neutral
Class III	Assets marked to market annually and most debt instruments, including accounts receivable	Present when receivables transfer, common on annual contracts	No deduction. Income is reduced as the receivable is collected	Mildly contested, usually settled at face less an allowance
Class IV	Inventory and property held primarily for sale to customers in the ordinary course	Usually zero on pure SaaS. Real on a hardware or ecommerce hybrid	Cost of goods sold when the item is sold	Seller resists. Inventory is ordinary income to them
Class V	All assets not in another class. Furniture, fixtures, equipment, vehicles, land and buildings	Small. Laptops, servers, occasionally a domain treated as tangible	Depreciated under MACRS, and may qualify for section 179 or bonus depreciation	The most contested class on a small deal. Fast deductions for you, depreciation recapture at ordinary rates for them
Class VI	Section 197 intangibles other than goodwill. Workforce in place, customer lists, licenses, trademarks, trade names and covenants not to compete	Large on a SaaS deal. Customer relationships and the codebase-adjacent intangibles live here	Amortized straight line over 15 years under section 197	Contested for one specific line. A covenant not to compete is ordinary income to the seller
Class VII	Goodwill and going concern value, whether or not it qualifies as a section 197 intangible	The residual, and on a profitable SaaS business usually the largest single class	Amortized straight line over 15 years under section 197	Seller pushes value here. Goodwill is generally capital gain to them

Class definitions are from the Instructions for Form 8594, revision November 2021, read firsthand on 1 September 2026. The allocation order and the residual treatment of Class VII follow the residual method under Treasury Regulations sections 1.338-6 and 1.338-7, as the instructions direct. The typical size and argument columns are our reading of small US software transactions and are not from any published survey. Nothing here is tax advice.

Statutory treatment, section 197 and section 1245

What each class is worth to you, and what it costs the seller

This is the table that explains why the allocation is negotiated at all. The buyer is buying a deduction on a timetable. The seller is realizing income at a rate. The two do not line up, and knowing exactly where they diverge tells you which classes are worth arguing about and which are not.

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Class	Buyer cost recovery	Seller tax character	Who wants the number higher
Class I to III	No deduction on purchase. Basis equals the amount allocated	Generally no gain, these are recorded at value	Neutral, so agree them quickly and spend the time elsewhere
Class IV inventory	Deducted as cost of goods sold when the inventory is sold, so often within months	Ordinary income	Buyer prefers a higher number, seller prefers a lower one
Class V tangible	Depreciated under MACRS over the asset life, with section 179 and bonus depreciation potentially accelerating it	Section 1245 depreciation recapture, taxed as ordinary income up to prior depreciation	Buyer prefers a higher number. Seller resists hardest here
Class VI covenant not to compete	Amortized over 15 years under section 197, regardless of the length of the covenant itself	Ordinary income to the seller	Both sides usually want it small, which is why it is often set at a token amount
Class VI other intangibles	Amortized over 15 years under section 197	Generally capital, though treatment varies by the specific intangible	Broadly neutral between the parties on rate, so the argument is about size
Class VII goodwill	Amortized over 15 years under section 197	Generally capital gain to the seller	Seller pushes hard for this class. It costs the buyer nothing versus Class VI

The 15 year amortization period for Class VI and Class VII comes from section 197(a), which amortizes the adjusted basis of an amortizable section 197 intangible ratably over the 15 year period beginning with the month of acquisition. The list of section 197 intangibles, including goodwill, going concern value, workforce in place, customer based intangibles, covenants not to compete, franchises, trademarks and trade names, is from section 197(d). Both were read firsthand on 1 September 2026. Seller characterization is stated generally: the treatment of a specific asset depends on holding period, prior depreciation and facts this page does not know. Take the schedule to your own accountant before you sign it.

Side by side

Allocating a verified price versus allocating a number you took on trust

A fair look at what each does well. Both are useful. Here is where they differ.

Feature	Buyouts	Treating the price as one number
Where the residual actually comes from	A price agreed on MRR, ARR, growth and churn that were verified before the listing went live	A price agreed on numbers the buyer took on trust, then allocated as if they were facts
Valuing Class III receivables	Aged against the verified subscription ledger and the processor export	Recorded at face because nobody checked which accounts had already churned
Defending Class VI customer intangibles	Retention is documented, so the customer relationship has an evidenced life	An assertion about durability with nothing behind it if it is ever questioned
When the schedule gets written	Alongside the purchase agreement, while both sides still need each other	In the spring, after the seller has been paid and has no reason to help
Cost of getting it wrong	Contained. The inputs are checkable	Two inconsistent filings describing one transaction, and penalties available under sections 6721 to 6724
What you can transact on today	Browsing is free and buyer membership is planned rather than on sale	A live deal you can close right now, which is a real advantage they have

Comparison reflects general, publicly understood positioning. Capabilities change, so check each marketplace for the latest. Trademarks belong to their owners.

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The residual method, in the order you actually apply it

The IRS Instructions for Form 8594, revision November 2021, direct you to allocate using the residual method under Treasury Regulations sections 1.338-6 and 1.338-7. That means you do not decide the split by negotiation and then work backwards. You work down the ladder. Start with the total consideration, which is the purchase price plus any liabilities you assume. Assign Class I assets at their face amount. Then Class II, then Class III, then Class IV, then Class V, each at fair market value, and stop assigning at each level once the remaining consideration runs out. Then Class VI, again at fair market value. Whatever consideration is still unallocated after Class VI falls into Class VII as goodwill and going concern value. Class VII is a residual by definition, which is why the instructions call it that and why nobody appraises goodwill directly on a small deal. The practical consequence is that every dollar you can defend in Class V or Class VI comes out of Class VII. On a $600,000 SaaS acquisition where the tangible assets are three laptops and a server, the honest answer is usually that Class V is small, Class VI is meaningful, and Class VII is most of the price. A schedule that puts $200,000 of a $600,000 software purchase into equipment is not aggressive tax planning. It is a number that will not survive a question.

Why the buyer and the seller want different answers

Both parties file Form 8594 and both report the same seven classes, which is why the allocation is a negotiation rather than an accounting task. The reason the interests diverge is that the buyer is buying deductions on a timetable while the seller is realizing income at a rate. For you, the useful distinction is speed. Class IV inventory turns into a deduction within months. Class V equipment depreciates over years and may be accelerated by section 179 or bonus depreciation. Class VI and Class VII both amortize ratably over the 15 year period section 197(a) sets, beginning with the month the intangible was acquired. So on the buyer side, moving value from goodwill into a customer list changes nothing at all, and moving value from goodwill into equipment changes a great deal. For the seller, the distinction is character. Inventory produces ordinary income. Depreciated equipment produces section 1245 recapture, also at ordinary rates, up to the depreciation they previously claimed. Goodwill is generally capital gain. A covenant not to compete is ordinary income even though it sits in the same class as intangibles that are not. That last asymmetry is why covenants are so often papered at a nominal figure, and why a buyer who insists on a large covenant value is asking the seller to accept a worse rate on money the buyer will only recover over 15 years anyway.

Put the allocation in the purchase agreement, not in the tax return

Section 1060(a) is unusually direct. If the transferee and transferor agree in writing as to the allocation of any consideration, or as to the fair market value of any of the assets, that agreement is binding on both of them unless the Secretary determines the allocation or value is not appropriate. A written allocation schedule attached to the asset purchase agreement is therefore the whole ballgame. Buyers get this wrong in a predictable way. They close, they file, and then in the following spring their accountant asks for the allocation and there is nothing to point at. Now the seller has already banked the money, has no incentive to cooperate, and has an accountant of their own arguing the opposite direction. There is no requirement that the two filed forms match, but a mismatch is exactly the kind of discrepancy that invites the IRS to look at both returns, and the instructions note that failure to comply with the reporting rules can trigger penalties under sections 6721 through 6724. Draft it as a schedule with a dollar figure against each of the seven classes, have both sides sign it, and require in the agreement that both parties file consistently with it. It is a short document, it costs almost nothing to add while the lawyers are already drafting, and it removes a whole category of argument that otherwise arrives four months after you have lost your leverage.

What this looks like on a real software acquisition

Take a business acquisition at $600,000 where the target is a small B2B SaaS with a handful of laptops, a modest server bill, annual contracts producing $28,000 of receivables at closing, no inventory, a customer base of a few hundred accounts and a founder signing a three year non compete. A defensible schedule looks roughly like this. Class I is nil on a cash free deal. Class II is nil. Class III takes the $28,000 of receivables at face, possibly less an allowance for the ones that will not collect. Class IV is nil because there is no inventory. Class V takes the hardware at its actual fair market value, which for used laptops and a server is likely to be under $10,000, not the price the seller paid for them. Class VI takes the customer relationships, the trade name, the assembled workforce if anyone transfers, and a stated value for the covenant not to compete. Class VII takes the residual, which here is most of the price. The instinct to shift value into Class V is understandable and, at this scale, not worth much. Ten thousand dollars of equipment depreciated quickly is worth a fraction of a percent of a $600,000 deal, and an inflated equipment figure is the single easiest thing for an examiner to test, because used hardware has an observable market. The place where real money moves on a software deal is whether Class VI and Class VII are properly separated at all, and whether the receivables were valued at face or at what they will actually collect.

The valuation you may be required to buy anyway

If you are financing the acquisition with an SBA 7(a) loan, a third party is going to put a value on the business regardless of what you and the seller agree. Under SOP 50 10 8, effective 1 June 2025, a change of ownership requires an independent business valuation, and the loan file cannot rely on a valuation prepared for you or for the seller. Writing in QuickRead on 22 October 2025, Daniel R. Basch, CPA, ABV, CVA, MBA, read the SOP as requiring an outside valuation once the goodwill or intangible portion exceeds $250,000 or where the buyer and seller have a close relationship, with the lender permitted to perform its own analysis in house at or below that figure, and with the lender required to engage the appraiser directly. The credentials the SOP accepts are specific: Accredited Senior Appraiser, Certified Business Appraiser, Accredited in Business Valuation, Certified Valuation Analyst and Business Certified Appraiser. SOP 50 10 8.1, which applies to applications issued a loan number on or after 1 October 2026, additionally makes a Quality of Earnings report mandatory where the purchase price is $3,000,000 or more, measured before buyer equity or seller debt. That valuation is not the same document as your allocation schedule and it will not do the allocation for you. But it establishes an independent view of enterprise value in the file, and a purchase price allocation that contradicts it is a conversation you would rather not have with either your lender or your accountant. Order the valuation early, read it, and draft the schedule with it in front of you.

What the allocation cannot fix

An allocation schedule divides a number. It does not tell you whether the number was right, and it certainly does not tell you whether the revenue underneath it is real. Every class from III through VII is a statement about the fair market value of something you are taking on trust from the seller unless you verified it. Receivables are the clearest case. Class III is reported at fair market value, and the fair market value of a receivable from a customer who churned last month is not its face amount. Class VI is a statement that a customer base has durable value, which is a claim about retention. Class VII is whatever is left, which is to say it is the part of the price that rests entirely on the business continuing to perform the way the seller told you it performs. This is the part of the problem that paperwork cannot solve and diligence can. Tie the revenue to bank deposits, read the payment processor export, reconcile the subscription ledger against both, and age the receivables properly before you agree a Class III figure. On Buyouts, MRR, ARR, growth and churn are verified before a listing goes live, which is a different way of getting to the same place. The allocation is the last step of a purchase, and it is only as honest as the diligence that came before it.

Good questions

Purchase price allocation and Form 8594, answered

Purchase price allocation is the process of splitting the total consideration paid for a business across the individual assets acquired. On a US asset acquisition, section 1060 of the Internal Revenue Code requires the buyer and the seller to allocate that consideration across seven asset classes using the residual method, and both file the result with the IRS on Form 8594. The allocation determines the buyer's depreciation and amortization deductions and the seller's tax rate on each slice of the price.

Form 8594 is the Asset Acquisition Statement under section 1060. It reports how the buyer and seller allocated the purchase price across the seven asset classes when a group of assets constituting a trade or business changes hands. It is attached to the income tax return for the year the sale occurred, and both parties file their own copy.

Both. The IRS Instructions for Form 8594 state that both the purchaser and the seller must file when a group of assets making up a trade or business is transferred, goodwill or going concern value attaches, and the purchaser's basis is determined only by the amount paid. Each party attaches its own form to its own return for the year of the sale.

Class I is cash and general deposit accounts. Class II is actively traded personal property, certificates of deposit and foreign currency. Class III is assets marked to market annually and most debt instruments, which is where accounts receivable sit. Class IV is inventory. Class V is everything not in another class, typically equipment, furniture, vehicles, land and buildings. Class VI is section 197 intangibles other than goodwill. Class VII is goodwill and going concern value.

The residual method allocates consideration to each class in order, Class I first and Class VII last, at fair market value, and treats whatever is left after Class VI as goodwill and going concern value. The Instructions for Form 8594 direct filers to use the residual method under Treasury Regulations sections 1.338-6 and 1.338-7. Goodwill is therefore never appraised directly on this form. It is the remainder.

They are not required to file identical forms, but section 1060(a) provides that if they agree in writing as to the allocation or as to the fair market value of any of the assets, that agreement is binding on both of them unless the Secretary determines it is not appropriate. In practice that makes a signed allocation schedule attached to the purchase agreement the most reliable way to settle it, and mismatched filings are the pattern most likely to draw attention to both returns.

Inventory is Class IV. The instructions define Class IV as stock in trade of the taxpayer, or other property of a kind that would properly be included in inventory, or property held primarily for sale to customers in the ordinary course of business. On a pure software acquisition Class IV is usually zero.

Class V is the catch-all for assets that do not belong in Classes I, II, III, IV, VI or VII. In practice that means furniture and fixtures, buildings, land, vehicles and equipment. On a small software deal Class V is normally the used hardware, valued at what it would actually sell for rather than what the seller paid.

Class III covers assets that the taxpayer marks to market at least annually and debt instruments, including accounts receivable, with exclusions for certain related party debt, contingent instruments and convertible debt. On a subscription business with annual contracts, Class III is where the outstanding receivables land, and they belong at fair market value rather than face value if some of them will not collect.

Goodwill goes in Class VII, together with going concern value, whether or not it qualifies as a section 197 intangible. It is the residual class, so it absorbs whatever consideration remains once every earlier class has been assigned its fair market value. On a profitable software business it is usually the largest single number on the schedule.

Fifteen years. Section 197(a) entitles a taxpayer to an amortization deduction determined by amortizing the adjusted basis of an amortizable section 197 intangible ratably over the 15 year period beginning with the month in which the intangible was acquired. Class VI intangibles and Class VII goodwill are both on that same 15 year straight line, which is why moving value between those two classes changes nothing for the buyer.

Yes. Section 197(d) lists a covenant not to compete entered into in connection with the acquisition of an interest in a trade or business among the intangibles covered, so the buyer amortizes it over 15 years no matter how long the covenant itself runs. The complication is on the other side of the table: the payment is ordinary income to the seller, which is why covenant values are often negotiated down to a token figure.

Total the consideration, which is the price plus any liabilities you assume. Assign Class I at face, then work down through Classes II, III, IV, V and VI at fair market value, stopping when the consideration runs out. Whatever remains after Class VI is Class VII goodwill. Then write the resulting figures into a schedule, attach it to the asset purchase agreement, have both parties sign it, and require both to file consistently with it.

Nothing happens automatically, because there is no rule forcing the two forms to match. What changes is the risk profile. Two filings that describe the same transaction differently are a visible inconsistency, and the Instructions for Form 8594 note that failing to comply with the reporting requirements can result in penalties under sections 6721 through 6724. The cheap fix is to agree the schedule in writing before closing, which section 1060(a) then makes binding on both sides.

Not for the form itself. You need defensible fair market values, and on a small deal those usually come from observable evidence rather than an appraisal: what used hardware sells for, what the receivables will actually collect. A separate valuation becomes mandatory if you are borrowing. Under SOP 50 10 8, an SBA change of ownership requires an independent valuation, and it must be engaged by and prepared for the lender, not for you or the seller.

No US professional body publishes an average, and the firms that perform these engagements quote rather than post prices. What is published is pricing for the adjacent business valuation report. Swift Valuation lists a fee ladder effective 20 February 2026 running from $1,900 for a business under $500,000 of annual revenue to $3,900 above $10,000,000, with a two to three week turnaround. BGH Valuation publishes no price at all and states a 10 to 14 day standard turnaround with a five day rush option. Read those as adjacent market signals rather than as a quote for an allocation.

They answer different questions with similar words. ASC 805 governs how a business combination is accounted for in financial statements, which matters if you produce GAAP financials. Section 1060 and Form 8594 govern how the price is allocated for federal income tax. The two allocations frequently produce different numbers for the same deal, which surprises buyers who assumed one exercise would serve both purposes.

It is attached to your income tax return for the year in which the sale occurred, so it follows your normal return deadline rather than having one of its own. If the consideration later increases or decreases, for example when an earnout pays or a working capital adjustment settles, the instructions require a supplemental Form 8594 for the year in which the change is taken into account.

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